Maquiladoras: Final Window to Secure BAPAs and Avoid Mandatory Safe Harbor Rules in Mexico
In recent years, the manufacturing (maquiladora) industry in Mexico has undergone substantial changes in transfer pricing regulation that have significantly reshaped its tax compliance framework. Effective January 2022, the option to calculate profits based on Advance Pricing Agreements (APAs) was eliminated, and the safe harbor methodology became the only available mechanism to determine taxable profits for maquiladora operations. As outlined in this Holland & Knight alert, the window to secure Bilateral Advance Pricing Agreements (BAPAs), which enable avoidance of application of these mandatory safe harbor rules, is closing as of fiscal year 2025.
The safe harbor rules are based on calculating the taxable profits in maquiladora operations by applying fixed percentages of 6.9 percent over the total value of the assets used in the assembly plant or factory (maquila) operation, or 6.5 percent over the total amount of operating expenses (whichever is greater). Although these rules are deemed to reflect an arm's-length return for routine manufacturing services rendered to the foreign principal, the application of the same has typically resulted in greater amounts of taxable profits for the maquiladoras in Mexico. As such, the migration to the safe harbor rules may represent an increase in the Mexican income tax burden of different groups with factories in Mexico. Complying with these transfer pricing regulations also preserves certain tax benefits, such as avoidance of the creation of a permanent establishment in Mexico for the foreign principal.
The tax reform that generated these changes also established that APA applications submitted before Jan. 1, 2022, would continue to be resolved by the Mexican tax authorities under the prior provisions. Accordingly, some resolutions for APA requests before the reform may still be pending.
In fact, many manufacturing companies have not yet received their APA resolutions for the 2020-2024 period. Thus, maquiladoras currently awaiting APA resolutions may consider converting their unilateral APA requests into BAPAs. This alternative could allow them to extend their tax benefits, including maintaining the permanent establishment exemption beyond 2024.
Under current Mexican tax provisions, once these resolutions are finalized, taxpayers will no longer be able to renew their APAs and will instead need to calculate their profits through the safe harbor rules.
To be eligible for a BAPA, the maquiladora must have an open APA program for 2020-2024. Taxpayers that already have received APA rulings for that period, are currently applying the safe harbor regime or commenced operations after 2024 would not be eligible.
Taxpayers pursuing this option must request a prefiling meeting with the competent authorities to assess the feasibility. In Mexico, a BAPA request is expected to be admitted if there are no unresolved APA rulings through 2019 and no ongoing litigation related to a prior APA application.
Given this alternative, maquiladora groups should promptly evaluate their eligibility, gather the necessary documentation and coordinate with counsel to determine whether a BAPA filing is advisable in their specific circumstances.
For more information on this matter, please contact the authors.
Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular fact situation, we urge you to consult the authors of this publication, your Holland & Knight representative or other competent legal counsel.